LISBON, Portugal — Portugal's efforts to climb out of its economic crisis suffered a double setback Thursday as its credit rating was downgraded to junk status and a major strike gave voice to broad public outrage over austerity measures that have squeezed living standards.
Portugal's deepening plight underlined Europe's difficulties in finding a way out of the continent's government debt crisis which has recently shown alarming signs of spreading to bigger nations, most notably Italy.
Like others in the 17-country eurozone, Portugal has embarked on a big austerity program to make its debts sustainable. Earlier this year, Portugal followed Greece and Ireland in taking a bailout to avert bankruptcy.
As in Greece, though, the government's tough medicine, which is required by international creditors in return for the €78 billion ($104 billion) in bailout money, is unpopular. The strike had a huge turnout, making it possibly the biggest walkout in more than 20 years.
"They are trying to destroy the national health service, and salaries haven't gone up since 2004," striking doctor Pilar Vicente told Associated Press Television News.
Fitch blamed Portugal's "large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook" for its decision to cut the country's rating by one notch to BB+. Rival Moody's already rates Portuguese bonds as junk but Standard & Poor's rates them one notch above.
Fitch's decision to cut Portugal to a non-investment grade will likely mean it's even more difficult for the country, which is already mired in a deep recession and is witnessing rising levels of unemployment, to return to bond markets by its 2013 goal. That raises the unappetizing prospect that Portugal, like Greece, may need a second bailout.
"Portugal's downgrade goes to show how hard it will be for troubled economies to pull themselves out of the crisis and how long this will take," said Sony Kapoor, managing director of Re-Define, an economic think tank. "The Portuguese downgrade highlights the limits of austerity policies both domestically in Portugal and in the wider euro area."
The 24-hour walkout came as Portugal, one of western Europe's smallest and frailest economies, endures increasing hardship as it tries to get its borrowing levels down.
The strike was called by Portugal's two largest trade union confederations, representing more than 1 million mostly blue-collar workers. Much of the private sector remained open for business though a huge Volkswagen car plant south of Lisbon, which accounts for 10 percent of Portuguese exports, decided to shut down production for the day because of problems facing its suppliers.
Much of the disruption was centered on the transport sector. Airlines canceled hundreds of international flights, and the airports of Lisbon, Porto and Faro were mostly empty as tens of thousands of workers walked off the job. Commuters had to get to work without regular bus or train services. The Lisbon subway was shut, and police said roads into the capital were more congested than normal.
Few staff were working at government offices, local media reported. Many medical appointments, school classes and court hearings were canceled, while mail deliveries and trash collection were said to be severely disrupted.
An unsustainable debt load and feeble economic growth over the past 10 years pushed Portugal towards bankruptcy earlier this year, forcing it to ask for a financial rescue.
In return for the aid, Portugal agreed to cut its debt burden to a manageable level by 2013. That goal requires it to enact deep spending cuts and hike taxes. Income tax, sales tax, corporate tax and property tax are all being increased. At the same time, welfare entitlements are being curtailed. Falling living standards have stoked outrage at the austerity measures.
"All the sacrifices the Portuguese are making today will prove worthwhile in the future," Parliamentary Affairs Minister Miguel Relvas told reporters.
A key difference from Greece is that the markets have not given up completely on Portugal. Though Portugal's key ten-year borrowing rate in the market stands at a still-exorbitant 12 percent, it's way below the 30 percent or so Greek equivalent. The aim is to eventually get that rate down below the 7 percent threshold that eventually proved to be the trigger for this year's bailout.
The Portuguese government, which came to power in June, has already conceded that its deficit reduction efforts have gone "off track" this year but says one-off measures, such as a 50 percent tax on Christmas bonuses and transferring banks' pension funds to the Treasury, will ensure Portugal achieves its 2011 budget deficit goal of 5.9 percent. That is down from 9.8 percent in 2010.
Debt is also expected to surpass 100 percent of GDP this year and peak at 106 percent in 2013 before retreating.
The austerity drive is hitting the real economy hard. Unemployment is up to 12.4 percent and is forecast to hit 13.4 percent next year. The European Commission predicts the Portuguese economy will contract by 3 percent in 2012 — the worst performance in the eurozone.
Fitch said that the recession is making it more "challenging" for the government to achieve its deficit-reduction plan and will negatively impact bank asset quality. However, Fitch said the center-right government's commitment to the debt-reduction program was "strong."
Portugal has so far witnessed none of the violent demonstrations seen in Greece, though police said three Lisbon tax offices were vandalized Wednesday night.